System and Method for Smart Hedging in an Electronic Trading Environment

ABSTRACT

A system and associated methods are provided for smart hedging in an electronic trading environment. According to one example method, a first order for a first tradeable object and a second order for a second tradeable object are placed based on a spread strategy. Upon receiving an indication that a quantity of the first order is filled, the method involves determining if the second order can be used to offset the quantity filled of the first order by determining if a price of the second order would result in achieving a desired spread price defined for the spread strategy. If the price results in the desired price, the second order is used to offset the quantity filled for the first order in an attempt to achieve the desired spread price. Other tools are provided as well.

CROSS REFERENCE TO RELATED APPLICATIONS

This application is a continuation of U.S. patent application Ser. No.13/563,349, filed on Jul. 31, 2012, which is a continuation of U.S.patent application Ser. No. 13/442,691, filed on Apr. 9, 2012, now U.S.Pat. No. 8,266,049, which is a continuation of U.S. patent applicationSer. No. 12/774,930, filed on May 6, 2010, now U.S. Pat. No. 8,185,468,which is a continuation of U.S. patent application Ser. No. 11/415,351,filed on May 1, 2006, now U.S. Pat. No. 7,742,976, which is acontinuation of U.S. patent application Ser. No. 11/241,716, filed onSep. 30, 2005, now U.S. Pat. No. 7,747,510, entitled “System and Methodfor Smart Hedging in an Electronic Trading Environment,” the contents ofall of which are fully incorporated herein by reference.

TECHNICAL FIELD

The present invention is directed to electronic trading. Morespecifically, the present invention is directed towards automated orderentry tools in an electronic trading environment.

BACKGROUND

Trading methods have evolved from a manually intensive process to atechnology enabled, electronic platform. With the advent of electronictrading, a user or trader can be in virtually direct contact with themarket, from practically anywhere in the world, performing nearreal-time transactions.

Electronic trading is generally based on a host exchange, one or morecomputer networks, and client devices. In general, the host exchangeincludes one or more centralized computers to form the electronic heart.Its operations typically include maintaining an exchange order book thatrecords unexecuted orders, order matching, providing price and orderfill information, and managing and updating a database that records suchinformation. The host exchange is also equipped with an externalinterface that maintains uninterrupted contact to the client devices andpossibly other trading-related systems.

Using client devices, traders link to the host exchange through one ormore networks. A client device is a computer such as a personalcomputer, laptop computer, hand-held computer, and so forth that hasnetwork access. A network is a group of two or more computers or deviceslinked together in any fashion, which can be characterized by topology,protocol, and architecture. For example, some market participants maylink to the host through a direct network connection such as a T1 orISDN. Some participants may link to the host exchange through directnetwork connections and through other common network components such ashigh-speed servers, routers, and gateways. As explained in greaterdetail below, a client device may access an exchange through a gateway,and a router may route messages between the gateway and the exchange.The Internet, a well-known collection of networks and gateways, can beused to establish a connection between the client device and the hostexchange. There are many different types of wired and wireless networksand combinations of network types known in the art that can link tradersto the host exchange.

Sometimes, on their machines, traders use automated or semi-automatedtrading tools, collectively hereinafter referred to as automated tools,that automatically or semi-automatically send orders to the exchange.Such trading tools are usually provided to, among other things,facilitate fast and accurate order entry. For instance, an automatedtool might quickly calculate one or more order parameters, such as orderprice or order quantity, based on market conditions, or some otherreference condition, and then automatically send an order with theseparameters to an exchange for matching. According to many existing andpopular exchanges today, orders are electronically entered in anexchange order book in the sequence in which they are entered into themarket (a first-in, first-out, commonly referred to as FIFO matchingsystem). Based on this sequence, and the availability of marketquantity, orders are filled, with priority given to the first orderentered, then the second (next) order entered, and so forth. It shouldbe understood that different matching systems can be used as well.

In addition to trading individual tradeable objects, many traders oftenimplement trading strategies that involve simultaneous trading of two ormore tradeable objects. One such trading strategy is commonly referredto as spread trading. In general, spread trading is the buying and/orselling of one, two, or more tradeable objects, the purpose of which isto capitalize on changes or movements in the relationships between thetradeable objects. The tradeable objects that are used to complete aspread are referred to as the outright markets or legs of the spread. Aspread trade could involve buying tradeable objects, buying and sellingtradeable objects, selling tradeable objects or some combinationthereof.

As used herein, the term “tradeable object” refers to anything that canbe traded with a quantity and/or price. It includes, but is not limitedto, all types of traded events, goods and/or financial products, whichcan include, for example, stocks, options, bonds, futures, currency, andwarrants, as well as funds, derivatives and collections of theforegoing, and all types of commodities, such as grains, energy, andmetals. The tradeable object may be “real,” such as products that arelisted by an exchange for trading, or “synthetic,” such as a combinationof real products that is created by the user. A tradeable object couldactually be a combination of other tradeable objects, such as a class oftradeable objects.

Spread trading may involve risk. For example, to achieve a spreaddifferential, a trader typically works orders in two or more differentmarkets. An order in one of those markets may fill, but the marketconditions could change in another market, leaving the offsetting orderunfilled and the spread incomplete. This results in the trading being“legged up,” because only one side of the spread transaction iscomplete. As a result, the trader might lose large amounts of money tocomplete the transaction at an undesirable price, or remain unfilledtotally.

Currently, there are two ways a trader could trade a spread. To avoidsome of the risks of being “legged up,” traders may trade in exchangeprovided spread markets. Electronic exchanges have introduced spreadmarkets that guarantee the trader will not be “legged up” by takingcertain precautions, for example. Accordingly, those exchange providedspreads might behave differently than if they did not provide this“no-legged” up guarantee. The different behavior expressed by thesetypes of exchange-provided-spreads might result in less aggressive andless riskier trading than through conventional spread trading where thetrader works orders in multiple markets to achieve a spread differentialupon execution.

According to the second method, traders can use automated spread tradingtools that allow them to create their own spreads, often referred to assynthetic spreads. Once a trader defines a synthetic spread, anautomated spread trading tool may generate spread market data for thesynthetic spread without facing the exchange-imposed limitations. Whilea trader who trades spreads using an automated spread trading tool maysometimes face a problem of getting legged up, the automated spreadtrading tool can generally allow the trader to be more aggressive inhis/her trading, and thus potentially result in greater profits for thetrader.

Typically, when a trader enters a desired spread order price based onthe provided spread data, an automated spread trading tool will usespread setting parameters defined by the trader to place an order in thelegs of the spread. As the markets in each leg move, individual spreadleg orders may be re-priced by an automated spread trading tool toachieve the desired price defined for a synthetic spread. Re-pricing oforders generally involves canceling the existing order at one price andreplacing it with a new order at another price. Such a mechanism, whilevery helpful to a trader to achieve a desired spread price, results inthe newly submitted order being placed at the end of an order queuecorresponding to the order's new price at an electronic exchange.However, it is desirable to have orders as close to the front of theorder queue as possible to increase the likelihood of the orders gettingfilled. Thus, re-pricing the order increases the likelihood of the ordernot getting filled. It is desirable to offer tools that can assist atrader in trading in an electronic trading environment, and help thetrader make trades at the most favorable prices in a speedy and accuratemanner.

BRIEF DESCRIPTION OF THE DRAWINGS

Example embodiments are described herein with reference to the followingdrawings, in which:

FIG. 1 illustrates a trading system for electronic trading according toan example embodiment, wherein the trading system includes a tradingstation where a trader can submit bids and offers for a tradeable objectbeing traded at an electronic exchange;

FIG. 2 illustrates another trading system for electronic tradingaccording to another example embodiment, wherein this trading systemincludes a trading station where a trader can submit bids and offers fora tradeable object being traded at more than one electronic exchange;

FIG. 3 illustrates an example trading station 300 where a user cansubmit bids and offers for a tradeable object being traded at one ormore exchanges;

FIG. 4 illustrates an example relationship between a syntheticallycreated spread and its underlying “N” number of legs;

FIG. 5 illustrates the same relationship between spread and itsunderlying legs as in FIG. 4, except that a synthetic spread order hasbeen placed;

FIG. 6 illustrates a data flow diagram that demonstrates an examplemethod for order placement according to one example embodiment;

FIG. 7 illustrates a data flow diagram that demonstrates an examplemethod for re-pricing a spread leg order according to one exampleembodiment;

FIG. 8 illustrates an example block diagram of a spread setupconfiguration window that can be used by a trader to define a spread;

FIG. 9 illustrates an example block diagram of an order ticket that canbe used to enter spread orders according to one example embodiment;

FIG. 10 illustrates an example trading interface that is used toillustrate placing of a spread order according to one exampleembodiment;

FIG. 11 illustrates an example trading interface that is used toillustrate placing of a number of queue holder orders in one leg of thespread according to one example embodiment;

FIG. 12 illustrates an example trading interface that is used toillustrate how queue holder orders based on market changes in a secondleg of the spread according to one example embodiment; and

FIG. 13 illustrates a trading interface that shows an execution statuscorresponding to a spread order according to one example embodiment.

DETAILED DESCRIPTION I. Overview

Example system and associated methods described below provide means forintelligent placement and movement of orders within a range of prices.Using the described methods a trader may potentially get a morefavorable queue position for spread leg orders when changes in themarket corresponding to the leg order cause re-pricing of one or moreleg orders. More specifically, according to the example embodimentsdescribed below, in addition to submitting a leg order at a calculatedprice level, additional orders at prices either below or above thecalculated price level are submitted as well for the same leg to ensurea better queue position for the future re-priced leg orders. Accordingto such an embodiment, if the market changes such that it is necessaryto re-price either or both leg orders, the leg orders at the initiallycalculated prices may be deleted, and there will already be leg ordersresting in the order queue at the re-calculated leg order prices.

Another trading tool that is described herein relates to smart hedgingin relation to a predefined trading strategy. According to one examplemethod, a trader may establish a spread strategy comprising at least afirst tradeable object and a second tradeable object and a desiredspread price. Upon establishing the spread strategy, a first order maybe placed in an order book of a first electronic matching processcorresponding to the first tradeable object. The first order is placedat a first price that is computed based on market conditions in thesecond tradeable object and the desired spread price. Also, a secondorder is placed in an order book of a second electronic matching processcorresponding to the second tradeable object. The second order is placedat a second price that is computed based on market conditions in thefirst tradeable object and the desired spread price. Upon receiving anindication that a quantity of the first order is filled by the firstelectronic matching process, the method includes determining whether thesecond order can be used to offset the quantity filled for the firstorder. This determination may be based on checking if the second pricecorresponding to the second order would result in achieving a priceassociated with the desired spread price, and, if so, using the secondorder to offset the quantity for the first order in an attempt toachieve the desired spread price. Additional details related to smarthedging as well as other trading tools will be described in greaterdetail below.

Thus, one advantage of the example methods is that the re-priced legorders will have better queue positions as compared to the orders thatwould be submitted upon detecting a re-price command in response tochanging market conditions. Also, the example methods may result in morefills and fewer orders getting “legged up.” It should be understood thatadditional advantages will be apparent to those skilled in the art aswell. More details related to queue holder orders as well as other toolsthat can be used in relation to trading strategies will be describedbelow.

While the example embodiments are described herein with reference toillustrative embodiments for particular applications, it should beunderstood that the example embodiments are not limited thereto. Othersystems, methods, and advantages of the present embodiments will be orbecome apparent to one with skill in the art upon examination of thefollowing drawings and description. It is intended that all suchadditional systems, methods, features, and advantages be within thescope of the present invention, and be protected by the accompanyingclaims.

II. A First Example Trading System

FIG. 1 illustrates an example electronic trading system in which theexample embodiments may be employed. In this example, the systemcomprises a trading station 102 that accesses an electronic exchange 104through a gateway 106. Router 108 is used to route messages between thegateway 106 and the electronic exchange 104. The electronic exchange 104includes a computer process (e.g., the central computer) that matchesbuy and sell orders sent from the trading station 102 with orders fromother trading stations (not shown). The electronic exchange 104 may listone or more tradeable objects for trade. While not shown in the figurefor the sake of clarity, the trading system may include other devicesthat are specific to the client site like middleware and securitymeasures such as firewalls, hubs, security managers, and so on, asunderstood by a person skilled in the art.

The computer employed as the trading station 102 generally can rangefrom a hand-held device, laptop, or personal computer to a largercomputer such as a workstation and multiprocessor. An illustrativepersonal computer uses Pentium™ microprocessors and operates under aWindows 2000™, Windows NT™, or Windows XP™ operating system with 3Com's3CR990-TX-97 network card. Generally, the trading station 102 includes amonitor (or any other output device) and an input device, such as akeyboard and/or a two or three-button mouse to support click basedtrading, if so desired. One skilled in the art of computer systems willunderstand that the present example embodiments are not limited to anyparticular class or model of computer employed for the trading station102 and will be able to select an appropriate system.

The computer employed as the gateway 106 generally can range from apersonal computer to a larger computer. An illustrative gateway 106computer may use Pentium™ microprocessors and may operate under aWindows 2000™ or Windows NT™ (server or workstation) operating system.Generally, the gateway 106 may additionally include a monitor (or anyother output device), input device, and access to a database, if sodesired. One skilled in the art of computer systems will also understandthat the present example embodiments are not limited to any particularclass or model of computer(s) employed for the gateway 106 and will beable to select an appropriate system.

It should be noted that a computer system that may be employed here as atrading station or a gateway generally includes a central processingunit, a memory (a primary and/or secondary memory unit), an inputinterface for receiving data from a communications network, an inputinterface for receiving input signals from one or more input devices(for example, a keyboard, mouse, etc.), and an output interface forcommunications with an output device (for example, a monitor). A systembus or an equivalent system may provide communications between thesevarious elements.

It should also be noted that the trading station 102 generally executesapplication programs resident at the trading station 102 under thecontrol of the operating system of the trading station 102. Also, thegateway 106 executes application programs resident at the gateway 106under the control of the operating system of the gateway 106. In otherembodiments and as understood by a person skilled in the art, thefunction of the application programs at the trading station 102 may beperformed by the gateway 106, and likewise, the function of theapplication programs at the gateway 106 may be performed by the tradingstation 102.

The actual electronic trading system configurations are numerous, and aperson skilled in the art of electronic trading systems would be able toconstruct a suitable network configuration. For the purposes ofillustration, some example configurations are provided to illustratewhere the elements may be physically located and how they might beconnected to form an electronic trading system; these illustrations aremeant to be helpful to the reader and they are not meant to be limiting.According to one example illustration, the gateway device may be locatedat the client site along with the trading station, which is usuallyremote from the matching process at the electronic exchange. Accordingto this instance, the trading station, the gateway, and the router maycommunicate over a local area network, and the router may communicatewith the matching process at the electronic exchange over a T1, T3,ISDN, or some other high speed connection.

In another example illustration, the client site may be located on theactual grounds of the electronic exchange (for example, in the buildingof the exchange). According to this instance, the trading station 102,the gateway 106, and the router 108 may still communicate over a localarea network, but the router 108 may communicate with the matchingprocess at the electronic exchange through another connection meansbesides a T1, T3, or ISDN.

In yet another example illustration, the gateway 106 may be housed at,or near, its corresponding electronic exchange 104. According to thisinstance, the trading station 102 may communicate with the gateway 106over a wide area network or through the use of a T1, T3, ISDN, or someother high speed connection.

In another example illustration, the gateway 106 may be located remotefrom the trading station 102 and remote from the electronic exchange104, which might be particularly useful in systems that includeinterconnection of multiple trading networks. Thus, one trading networkmight have gateway access to an electronic exchange. Then, other tradingnetworks may communicate with the trading network that has gatewayaccess through a T1, T3, ISDN, or some other high speed connection.

III. A Second Example Trading System

FIG. 2 illustrates another example trading system that uses similarcomputer elements as shown in FIG. 1, in which, the example embodimentsmay be employed to trade at multiple electronic exchanges. The systemcomprises a trading station 202 that can access multiple electronicexchanges 204 and 208. In this particular embodiment, electronicexchange 204 is accessed through gateway 206 and electronic exchange 208is accessed through another gateway 210. Alternatively, a single gatewaymay be programmed to handle more than one electronic exchange. Router212 is used to route messages between the gateways 206 and 210 and theelectronic exchanges 204 and 208. While not shown in the figure, thesystem may include other devices that are specific to the client sitelike middleware and security measures like firewalls, hubs, securitymanagers, and so on, as understood by a person skilled in the art.Additional electronic exchanges may be added to the system so that thetrader can trade at any number of exchanges, if so desired.

The trading system presented in FIG. 2 provides the trader with theopportunity to trade tradeable objects listed at different electronicexchanges. To some traders, there can be many advantages with amulti-exchange environment. For example, a trader could view marketinformation from each tradeable object through one common visualdisplay. As such, price and quantity information from the two separateexchanges may be presented together so that the trader can view bothmarkets simultaneously in the same window. In another example, a tradercan spread trade, as will be described in greater detail below,different tradeable objects listed at the different electronicexchanges.

As indicated earlier, one skilled in the art of electronic tradingsystems will understand that the present embodiments are not limited tothe particular configurations illustrated and described with respect toFIG. 1 and FIG. 2, and will be able to design a particular system basedon the specific requirements (for example, by adding additionalexchanges, gateways, trading stations, routers, or other computersserving various functions like message handling and security).Additionally, several networks, like either of the networks shown inFIG. 1 or FIG. 2, may be linked together to communicatively access oneor more electronic exchanges.

IV. An Example Trading Station

FIG. 3 shows an overview of a trading station 300 which is similar tothe type of trading stations 102 and 202 shown in FIGS. 1 and 2. Tradingstation 300 can be any particular type of computing device, examples ofwhich were enumerated above. According to one example embodiment,trading station 300 has a trading application 302 stored in memory thatwhen executed arranges and displays market information in manyparticular ways, usually depending on how the trader prefers to view theinformation. Trading application 302 may also implement an automatedtrading tool such as the automated spread trading tool thatautomatically sends orders into underlying legs to achieve a spread.Additionally, the example embodiments for regulating and managing orderentry may be part of trading application 302. Preferably, tradingapplication 302 has access to market information from one or moreexchanges 310 through API 304 (or application programming interface),and trading application 302 can also forward transaction information toexchange 310 via API 304. Alternatively, API 304 could be distributed sothat a portion of the API rests on the trading station 300 and agateway, or at the exchange 310. Additionally, trading application 302may receive signals from input device 312 via input device interface 306and can be given the ability to send signals to display device 314 viadisplay device interface 308.

Alternatively, the example embodiments described herein may be aseparate program from trading application 302, but still stored inmemory and executed on the trading station 300. In another alternativeembodiment, the preferred embodiments may be a program stored in memoryand executed on a device other than trading station 300. Example devicesmay include a gateway or some other well known intermediary device.

V. Automatic Spread Trading Overview

The example embodiments describe methods for placing orders related tospread trading strategies by an automated spread trading tool. However,the example embodiments described herein are not limited to automatedspread trading tools, and could be applied in relation to differentautomated trading tools. For example, another type of trading tool thathas an automated order entry system and may benefit using the preferredembodiments is described in U.S. patent application Ser. No. 10/284,584,filed on Oct. 31, 2002 and entitled, “System and Method for AutomatedTrading,” the contents of which are incorporated herein by reference.Also, the example embodiments are not limited to spreads, and could beeasily used in relation to different trading strategies as well. Theautomated trading tools may be located at the trading station, a server,or even at an exchange. If located at placed other than the tradingstation, the automated trading tools could be still controlled using theAPI at the trading station. One skilled in the art of trading mayreadily adapt the example embodiments to work with this type ofautomated trading tool, or yet some other type of trading tool ortrading strategies, using the teachings described herein.

To assist in understanding how an automated spread trading tool mightwork, a general description is provided below. However, an automatedspread trading tool and its functions are described in greater detail inU.S. patent application Ser. No. 10/137,979, filed on May 3, 2002 andentitled, “System and Method for Performing Automatic Spread Trading,”fully incorporated herein by reference.

According to one embodiment of an automated spread trading tool, atrader can select two or more individual tradeable objects, “legs,” tocreate a synthetic spread that is sometimes referred hereinafterinterchangeably as a spread. The automatic spread trading toolpreferably generates spread data based on information in the legs andbased on spread setting parameters, which are configurable by a user.The spread data is communicated to a graphical user interface where itis displayed in a spread window, and where data corresponding to thelegs of the spread may be displayed as well. At the client terminal, theuser can enter orders in the spread window, and the automated spreadtrading tool will automatically work the legs to achieve, or attempt toachieve (because the fill of the order is not always guaranteed) adesired spread.

FIG. 4 illustrates the relationship between a synthetically createdspread 400 and its underlying “N” legs 402, where N can be any numbergreater than 1. For example, a spread might have two legs, three legs,four legs, and so on. Generation of the spread 400 may be based onrelationships that exist between the legs 402. Some relationships whichmight be used are described in the above incorporated U.S. patentapplication Ser. No. 10/137,979. Also, one skilled in the art of tradingmay have their own relationships which they prefer to use. It is notnecessary to know these relationships, however, to understand theexample embodiments.

FIG. 5 illustrates the same relationship between synthetic spread 400and its underlying legs 402 as in FIG. 4, except that a spread order 404has been entered. When a trader enters an order to buy or to sell thespread (e.g., spread order 404) in a synthetic market, the automatedspread trading tool automatically places orders in the appropriate legsto achieve or attempt to achieve the desired spread 404. For example, toachieve synthetic spread order 404, the automated spread trading toolmay automatically enter orders 406, 408, . . . 410 into the underlyinglegs 402 (e.g., “Leg 1,” “Leg 2,” . . . “Leg N”). The automated spreadtrading tool may, among other things, calculate the quantities andprices for the orders 406, 408, 410 based on market conditions in theother legs and one or more parameters. For example, according to onetrading strategy, consider if “Leg 1 Order” 406 is a buy order, then theprice of order 406 may be based on the best bid price of “Leg 2” and onthe best bid price of each leg through “Leg N.” Of course, depending onthe trading strategy, the price of order 406 might be based only on someof the legs and not on all N legs. Alternatively, other tradingstrategies may be used to determine the price and quantities of theorders. For example, the price of buy order 406 may be determined basedon the best ask price of “Leg 2” and on the best ask price of each legthrough “Leg N” (or on only some of the N legs). Of course, the orderparameters of an order in one leg can be based on other types of marketconditions in the other legs such as the last traded price (LTP), thelast traded quantity (LTQ), a theoretical value, or some other referencepoint.

When the leg orders are generated by the automated spread trading tool,the leg order may be routed to one or more exchanges, depending on wherethe tradeable objects defined for the spread are traded. If the ordersare not filled right away when they are received at the exchange(s), theorders are forwarded to a matching process and placed in order queuescorresponding to the prices of each leg order.

According to the example embodiments, as the market conditions for eachleg move, an effective spread order price may be calculated. Forexample, if market conditions for “Leg 1” change, then an effectivespread order price associated with order 404 may be determined toreflect the new market conditions. Similarly, if market conditions for“Leg 2” change, then an effective spread order price associated withorder 404 may be determined Using a conventional automated spreadtrading tool, if the effective spread order price is different from thedesired spread order price, then the automated spread trading tool wouldmove or re-price the leg orders in an exchange order book to maintainthe desired spread order price. In particular, the leg order(s) would bedeleted from the exchange(s), and new leg order(s) would be sent to theexchange to maintain the desired spread price. There are other ways tochange an order which may provide similar results, such as sending achange order request message to an exchange at which the order wasplaced, etc.

Alternatively, effective prices of spread orders can be calculatedcontinuously. For example, the effective spread order prices can becalculated every second or yet using some other time interval. Accordingto this alternative approach, it is not necessary to monitor changes inmarket conditions before an effective spread order price is calculated.Similarly to the above embodiment, however, using a conventionalautomated spread trading tool, if the effective price of the spreadorder is different from the desired price of the spread order, then theautomated spread trading tool would move or re-price the leg orders inthe order book(s) of one or more exchanges to maintain the desiredspread price being sought.

In an alternative embodiment, rather than calculating an effectivespread order price, the automated spread trading tool could calculateeffective prices of orders in each leg of the synthetic spread. Inparticular, as the market conditions for each leg move, the effectiveprices of orders in the other legs may be calculated such that thedesired spread price being sought by the trader can be maintained. Forexample, if market conditions for “Leg 1” change, then the effectiveprices of orders based on the market conditions in “Leg 1,” such asorder 408 through order 410 may be calculated to maintain the spread. Ifmarket conditions for “Leg 2” change, then the effective prices oforders based on market conditions in “Leg 2,” such as order 406 throughorder 410 may be calculated to maintain the desired spread price.Further, to maintain the desired spread price being sought, using aconventional automated spread trading tool, if the effective prices ofthe leg orders are different from the prices of the leg orders, then theautomated spread trading tool would move or re-price the leg orders inan exchange order book. In particular, the leg order(s) would be deletedfrom the exchange, and a new leg order(s) at the effective price wouldbe sent to the exchange.

VI. Queue Holder Overview

According to the spread trading systems described above, when marketconditions corresponding to one or more legs of a predefined syntheticspread change, one or more leg orders are re-priced in an exchange orderbook to achieve a desired spread price. Such a system, however, requirescancellation or change of the existing leg order(s) and placement of oneor more new leg orders, thus, causing placement of the new order at theend of an order queue corresponding to a new price of the leg order.

Example system and associated methods described herein provide means forintelligent placement and movement of orders within a range of prices.Using the described methods a trader may potentially get a morefavorable queue position for spread leg orders when changes in themarket corresponding to the leg order cause re-pricing of one or moreleg orders. More specifically, according to the example embodimentsdescribed below, in addition to submitting a leg order at a calculatedprice level, additional orders at prices either below or above thecalculated price level are submitted as well for the same leg to ensurea better queue position for the future re-priced orders. According tosuch an embodiment, if the market changes such that it is necessary tore-price either or both leg orders, the leg orders at the initiallycalculated prices may be deleted, and there will be already leg ordersresting at the re-calculated leg order prices. Thus, one advantage ofthe example methods is that the re-priced leg orders will have betterqueue positions as compared to the orders that would be submitted upondetecting a re-price command in response to changing market conditions.Also, the example methods may result in more fills and fewer ordersgetting legged up. It should be understood that additional advantageswill be apparent to those skilled in the art as well based on thedescription provided below.

A. Placement of a Leg Order

FIG. 6 is a flow diagram illustrating an example method 600 for orderplacement according to an example embodiment. It should be understoodthat each block in this and each subsequent flowcharts may represent amodule, segment, or portion of code, which includes one or moreexecutable instructions for implementing specific logical functions orsteps in the process. Alternate implementations are included within thescope of the example embodiments in which functions may be executed outof order from that shown or discussed, including substantiallyconcurrently or in reverse order, depending on the functionalityinvolved, as would be understood by those reasonably skilled in the artof the present invention.

The flow diagram 600 provides an example queue holder mechanism that canbe used to intelligently provide or attempt to provide more favorablequeue positions for trader's orders. The example method 600 is describedin relation to a spread strategy having two legs. However, the method600 could also be used in relation to different orders or tradingstrategies as well.

At step 602, a user defines an “N” number of orders to be placed in aleg of a synthetic spread. According to one example embodiment, “N” isan integer and represents a number of price levels other than thecalculated price level to be used in relation to an outright leg order,the first spread leg order, in this example. It should be understoodthat the same or different values of “N” could be used for each leg ofthe spread based on the user preferences. A trader could define “N”prior to trading or at any time during trading a spread. Also, “N” couldbe based on one or more user-defined equations, and could dynamicallychange based on predefined conditions.

At step 604, the user defines a desired price for a spread order. Inaddition to defining the desired price, the user could also define otherorder parameters, such as a desired spread order quantity. At step 606,in response to receiving spread order parameters, an automatic tradingtool, such as an auto-spreader, in this example, computes a price for anorder to be placed in the first leg of the spread, “leg 1.” As describedearlier, the price for the order of the first leg is computed based onmarket conditions of the second leg, “leg 2,” to achieve the desiredspread price. Also, the “leg 1” order could be either a buy order or asell order based on whether the spread order was a buy or sell, andfurther based on the spread configuration. At step 608, the automatedtrading tool places the order for “leg 1” at the computed price at anelectronic exchange. According to the example embodiment, placing theorder involves sending the order to a matching process located at theelectronic exchange.

At step 610, the trading tool determines if the order placed in “leg 1”of the spread was a buy or sell order. If the placed order was a buy, atstep 612, the automated trading tool places “N−1” orders in the firstleg of the spread at “N−1” price levels below the computed price. If theplaced order was a sell order, at step 614, the automated trading toolplaces “N−1” orders in “leg 1” of the spread at “N−1” price levels abovethe computed price. It should be understood that, according to oneexample embodiment, the prices below or above the computed pricescorresponding to the “N−1” orders are preferably consecutive prices.According to another example embodiment, some “N−1” prices could beconsecutive prices, while there could be price gaps between other pricescorresponding to other “N−1” orders. The prices for the “N−1” orderscould be alternatively determined based on a preset formula having oneor more market condition based variables.

Further alternatively, if there is not enough quantity at some pricelevels, “N” could be dynamically changed to ensure fill of the spreadorder. For example, if “N” were set to 2, and there were not enoughquantity at the “N−1” price level, “N” could be dynamically modified to3 or yet some other number to ensure the potential fill of the leg orderif the leg order had to be re-priced to the “N−1” level. It should beunderstood that different embodiments are possible as well. It should beunderstood that automatic modification of “N” could be based ondifferent variables as well. Also, while the method 600 was described inrelation to one spread leg order, the same method could be applied toother spread legs as well.

B. Re-Pricing the Leg Order

As mentioned earlier, when market conditions corresponding to leg orderschange, the automated spread trading tool has to re-price one or moreleg orders to new prices to achieve a desired spread order price.However, according to the example embodiment described in reference toFIG. 6, when the automated spread trading tool is to cancel or changethe existing leg order and replace it with a new order, there will bealready a leg order resting at the new re-calculated leg order price.Cancellation or change of the current leg order will also causeplacement of one or more additional orders at additional price levels tomaintain a desired number of leg orders, “N” in these examples, onemethod of which will be described in the following figure. As usedherein, order cancellation may be accomplished by either sending acancellation request, or if the order is being replaced with anotherorder, sending a change command. It should be understood that the meansthat is used for changing an order may be dependent on what options areallowed by an exchange.

FIG. 7 is a flow diagram illustrating an example method 700 forre-pricing a spread leg order according to one example embodiment. Themethod 700 is a continuation of the method 600 where “N−1” leg orders at“N−1” price levels were placed in relation to “leg 1” order.

At step 702, new market information is detected for a tradeable objectcorresponding to one or more spread leg orders, such as a tradeableobject corresponding to “leg 2” in this example. At step 704, theautomated spread trading tool computes an effective price of an order tobe placed in “leg 1” based on the new market conditions of “leg 2” andto achieve a desired spread price.

At step 706, the automated spread trading tool determines if the ordercorresponding to “leg 1” is a buy order or a sell order. If the order isa buy order, the method continues at step 708, where the automatedtrading tool retrieves the current highest buy order price among all “N”buy orders placed for “leg 1.” At step 710, the automated spread tradingtool determines if the effective order price computed for “leg 1” islower, higher, or equal to the highest buy order price corresponding to“leg 1.” If the effective order price is lower than the highest buyorder price among “N” orders placed for “leg 1,” the order at thehighest buy order price is moved to a price level below the N-th pricelevel, where the N-th price level is the price level furthest away fromthe highest buy order price. The movement of an order includescancellation of the leg order at the highest buy order price, andplacement of an order at a price below the N-th price level.Alternatively, depending on user-selected order management method, themovement of an order may include changing the leg order at the highestbuy order price to the price below the N-th price level. It should beunderstood that, if the effective order price moves by more than onetick, more than one order could be moved according to the exampleembodiments to maintain “N” orders for the leg.

Referring back to step 710, if the effective order price for “leg 1” ishigher than the highest buy order price, as shown at step 716, theautomated spread trading tool moves the order at the N-th price level toa price level equal to the effective price level. The movement of theorder in this embodiment involves cancellation of the order at the N-thprice level and placement of a new order at the effective order price.As explained earlier, if the effective price changes by more than onetick, more than one order would be moved according to the exampleembodiments to maintain “N” orders for the leg. Referring back to step710, if the effective order price is equal to the highest buy orderprice, all “N” orders for “leg 1” are maintained at their current pricelevels, and no action is taken.

Referring now back to step 706, if the submitted leg order is a sellorder, at step 724, the automated spread trading tool retrieves thecurrent lowest sell order price corresponding to the first of the “N”orders submitted for “leg 1.” Then, at step 726, it is determined if thenew effective leg order price is lower, higher, or equal to the lowestsell order price. At step 728, if the new effective order price is lowerthan the lowest sell order price, the automated spread trading tool maymove the order at the N-th price level to a price level equal to the neweffective price level. Similarly to the embodiments described above, themovement of the order involves cancellation of the order at the N-thprice level, and placement of a new order at the new effective pricelevel. Also, if the effective price level changes by more than one tick,more than one order could be moved to new price levels.

Referring to step 724, if the new effective price level is higher thanthe lowest sell order price, as shown at 732, the order at the lowestsell order price is moved to a price level above the N-th order. Morethan one order could be moved based on the changes of the tickdifferential between the effective price level and the lowest sell orderprice. Finally, at step 736, if the new effective order price is equalto the lowest sell order price, no action is taken.

While not shown in FIG. 7, it should be understood that when a leg ordergets filled the remaining “N−1” queue holder orders may be cancelledimmediately to avoid any unwanted fills. Alternatively, a trader maydefine a trading strategy to include two spread orders having identicalor slightly different desired spread prices. In such an embodiment,rather than deleting the remaining queue holder orders, the orders canbe used in relation to the second or even third spread trading strategy.For example, if the desired spread prices of two spread orders using thesame queue holder order are slightly different, upon completing thefirst spread strategy, some of the remaining queue holder order could bereused for the second spread strategy, while adding one or more newqueue holder orders, based on the settings defined for the queue holderorders.

C. Spread Configuration Window

FIG. 8 is a block diagram illustrating an example spread setupconfiguration window 800 that can be used by a trader to define aspread. The configuration window 800 shows an embodiment where a usercan configure parameters for a spread having two legs. However, itshould be understood that the example embodiments are not limited tospreads having two legs, and similar interfaces could be used toconfigure spreads having more than two legs as well.

The leg icons 802 and 804 provide status indicators for each leg of thespread. For example, the status indicators could be color coded toindicate a status corresponding to a tradeable object of each leg. Forexample, the icons 802 and 804 can be disabled when a connection to anexchange providing a tradeable object defined for a leg has not beenestablished. For example, one color, such as gray, could be used toindicate that no attempt has been made to activate a tradeable objectfor trading, a different color, such as yellow, could be used toindicate that the system is still waiting for response after attemptingto activate the tradeable object for trading, and green could be used toindicate a successful activation of the tradeable object for trading.

The spread set up configuration window 800 includes a number of fields806-812 that can be used to enter information related to a tradeableobject in each leg of the spread. The information in each of therespective fields could be either entered manually or could be copiedfrom another window interface, such as by dragging and dropping theinformation to the set up configuration window 800. The “Gateway” fields806 under each leg icon 802 and 804 can be used to specify a name of agateway to be used to receive information related to each respectivetradeable object. The “Gateway” fields could be automatically populatedupon selecting a tradeable object for each leg of the spread. The“Product” fields 808 are used to define a general category of tradeableobject, such as ZF, ZN, or yet some other product available atelectronic exchanges. The “Product Type” fields 810 can be used todefine a type of the product, such as futures, interest rates, etc. Asshown in FIG. 8, a drop down menu could be provided to allow selectionof different product types. Finally, the “Contract” fields 812 can beused to define contract identifiers, or product names. For example, whenthe product field includes a future product, the “Contract” field 812could specify the closing date corresponding to that tradeable object,such as Sep05.

The spread set up configuration window 800 also includes additionalfields that can be used to define a plurality of adjustable parameters.“Customer Account” field 814 can be used to select a customer account tobe used for trading a tradeable object corresponding to each leg of thespread. According to one example embodiment, the selection choices inthe pull down menu of the Customer Account fields could be automaticallypopulated based on data available from some other applications, such asan application that a trader uses to log onto an exchange. “SpreadMultiplier” fields 816 can be used to define values for use ofcalculating spread prices. “Order Size” fields 818 define the quantityfor each leg order. The plus and minus signs in relation to the definedquantities could be used to define if a leg order is a buy order or asell order, respectively.

“Queue Holder” fields 820 can be used to enter the number of levels(order levels) to be submitted for each leg, as was described in greaterdetail above. “Volume Multiplier” fields 822 allow a user to enter avalue to be used by the automated spread trading application tocalculate needed volume for a leg before an order corresponding to thatleg is placed at a specific price level. According to one exampleembodiment, the volume calculations could be based on the followingformula: (Hedge Size*Volume Multiplier+Base Volume), where the volumemultiplier and the base volume variables could be user configurable. Forexample, if a hedge size is 7, the minimum quantity of 7 would benormally needed if the volume multiplier was set to 1 and the basevolume was set to 0. Then, assuming that the volume multiplier was setto 5 with the base volume set to 0, the needed volume at a price wouldhave to be 35 before the order would be placed at that price. Then, forexample, with the volume multiplier set to 5 and the base volume set to25, the available quantity at a price would have to be 60 (7*5+25)before placing an order at that price.

A user could also define additional parameters to be used for preventingcontinuous re-quoting of leg orders associated with the syntheticspread. To do that, the user could enter a tick value in “Inside slop”824A and “Outside slop” fields 824B. The tick value defined in “Insideslop” and “Outside slop” fields 824A and 824B can then be used todetermine an acceptable range for the effective price of the leg order.In such an embodiment, if the effective price of the leg order fallswithin the acceptable range, the auto-spreader application does notre-price order. However, if that price falls outside the acceptablerange, the leg order will be re-priced to the new effective price level.

“Inside Anti-Slop” and “Outside Anti-Slop” fields 826A and 826B can beused by a trader to define a number of ticks to be used in relation tothe anti-slop functionality. In general, the anti-slop, when used,enables a trader to have his/her orders re-quoted when the effectiveorder price of an order falls close to the current market, i.e., withina predefined range away from the current inside market or yet some otherreference point. Using an inside anti-slop, an order would be re-quotedif the result of the re-quoting would put the order at a price levelwithin a predefined range away from the inside market. Using an outsideanti-slop, an order would be re-quoted if a price corresponding to theorder before the order is re-quoted falls within a predefined range awayfrom the inside market.

For example, if the inside anti-slop 826A is set to 4, with the insidemarket being used as a reference for a starting point of a range, anorder will be re-quoted only if the order's new price will fall within 4price levels from the inside market. Then, if the outside anti-slop 826Bis set to 4 while the inside market is still being used as a referencepoint, if a price corresponding to an order before the order is beingre-quoted falls within 4 price levels from the inside market, the orderwill be re-quoted to a new price. Similarly to the slop, the anti-slopcould be used by a trader to reduce the number of times an order isre-quoted based on changing market conditions.

The queue holder functionality of placing “N” orders for each leg couldbe manually or automatically disabled based on one or more conditions.Using the set up window 800, a user could use “Auto Break” fields 828 todefine a maximum number of ticks a price can move in a single updatebefore the market is deemed to be too volatile for use of the queueholder functionality. However, it should be understood that differentconditions could be applied as well, and some conditions could be basedon a user-defined equation having one or more predefined variables.

The set up window 800 may also display current market conditions for thetradeable objects corresponding to each leg of the spread. The extent ofthe market information can be user-configurable. The set up window 800includes “Best Bid” 830, “Best Ask” 832, and last traded price “Last”834. However, it should be understood that additional market relatedparameters could be provided as well, and the example embodiments arenot limited to the shown variables.

A trader could also define actions to be taken in relation to each legof the spread. For example, as shown in FIG. 8, a trader could activate“Active Quote” fields 836 with respect to each leg of the spread. Whenactive quoting is activated for a spread leg, an order may be submittedto that leg, and the leg order will be re-quoted based on market changesin the other leg(s) of the spread. Once the leg order gets filled, anoffset order is sent to the other leg. It should be understood thatactive quoting could be activated and used simultaneously in relation totwo or more leg orders defined for a spread. The set up configurationwindow 800 also includes “Cancel/Replace” fields 838 that can beactivated by a trader to indicate the mode of order entry in relation toN queue orders. If the “Cancel/Replace” fields 838 are not activated, adifferent mode, such as an order change, could be used.

“Hedge Down” fields 840 can be activated so that the automated spreaderapplication can do partial fill hedge quantity calculations by roundingthe quantity down. For example, when the “Hedge Down” 840 is activated,in relation to a 10:1 spread, and a quantity of 7 has been filled inrelation to a first leg of the spread, no hedge (offset) order would besent to the second leg of the spread until the entire quantity of 10 isfilled. If the fields 840 are not activated, default parameters, such asrounding hedge quantities on partial fills, or yet some otherfunctionality, could be used as well. Referring back to the aboveexample, but now using the rounding functionality, if the quantity of 7is filled on the first leg of the spread, a hedge order having an orderquantity of 1 would be sent to the second leg of the spread, with noaction taken when the remaining quantity of 3 is finally filled.Different embodiments are possible as well.

The spread configuration window 800 also includes a spread calculationpull down menu 842 that can be used by a trader to select a basis forcalculating spread related prices. For example, as shown at 842, atrader could select implied prices as the basis. However, differentembodiments are possible as well, such as using a net change or dividethat divides prices corresponding to one leg of the spread by prices ofthe other leg to be used as the basis in the spread price calculations.It should be understood that different embodiments are possible as well.

D. Order Ticket Window

According to one example embodiment, a trader could configure and submitsynthetic spread orders via an order ticket window. As will be describedin greater detail below, different order entry mechanisms could be usedas well, such as submitting a synthetic spread order directly through amarket depth trading window.

FIG. 9 is a block diagram illustrating an example order ticket 900 thatcan be used to enter spread orders according to one example embodiment.The order ticket 900 can be user configurable, and a trader could savedifferent order tickets under different workspaces that could beactivated based on the trader's preferences.

The order ticket 900 includes a price field 902 that can be used todefine a desired price for a synthetic spread. A user could adjust theprice value using the plus and minus buttons. Also, the value in theprice field 902 can be automatically populated based on a predefinedformula. According to one example embodiment, based on the price enteredin the price field 902, “Buy” and “Sell” buttons 922 and 924 can bedisabled to ensure that spread submission does not cross the market. Forexample, if a current best bid for a spread is at 99, and a priceentered in the price field 902 is 100, the “Buy” button could bedisabled to prevent a trader from entering an order that would cross thecurrent market. A trader could override the crossing the marketlimitation by making a predetermined selection input, such as selectingone or more predefined keys.

“Quantity” field 904 allows a trader to enter a desired number ofspreads to be bought or sold. According to one example embodiment, aquantity tool tip could be used to provide a user with the current stateof the queue holder, such as “working,” “done,” “ready,” etc. “QueueHolders” field 906 can be used to define a number of price levels(orders) to be submitted for each leg. If all legs of the spread havethe same number of queue holders, as defined in relation to FIG. 8, thequeue holder value at 906 could reflect the defined value. Also, if thesame value was defined for both legs of the spread in relation to FIG.8, a user could overwrite that value by defining a new queue holdernumber in the field 906.

The order ticket 900 also includes “Pay Up Tick” fields 908 that allow atrader to define pay up ticks to be used in relation to each hedge ordersubmitted for each leg of the synthetic spread. Each value in the “PayUp” field defines the number of ticks that a trader is willing to paybeyond the basis of the limit price to complete a spread, or, in otherwords, an acceptable range of prices for the offset order. In oneexample embodiment, the basis price of the limit order may be based on aprice that will achieve the desired spread price. Alternatively, thebasis price for limit orders could be based on the inside market (eitherthe best offer in the case of a bid or the best bid in the case of anoffer).

Using the pay-up ticks, a price for a limit order may be established byadding the pay-up tick value to the basis of a buy order and subtractedfrom the basis of the sell order. In other words, the pay-up ticks allowa trader to set a level of tolerance with respect to getting an orderfilled. According to one example embodiment, a trader could define thepay up ticks to be negative or positive. The order ticket 900 alsoincludes “Fractional Negative Pay-Up Ticks” fields 910, a “Scalping”field 912, and a “Smart Hedge” field 914, each of which will bedescribed below in the “Additional Trading Tools” section.

“Base Volume” fields 916 allow a user to dynamically adjust the basevolume for each tradeable object corresponding to a leg of the spread.According to one example embodiment, the base volume can be used todetermine a minimum quantity that is required in an appropriate offsetqueue in order for the spread to be quoted there. It should beunderstood that the base volume could be set manually or automaticallybased on a user-defined equation. The required volume can then becalculated using the formula described in greater above: (OrderSize)*(Volume Multiplier)+(Base Volume). However, different formulascould be used as well. In the provided example, a trader could defineany value to be used as the volume multiplier variable.

A “Delete All” field 918 allows a trader to clear all settings enteredvia the order ticket 900. “Hedge Fills” 920 can be used to activatesending of a hedge order when one leg is filled. When the “Hedge Fills”field 920 is disabled, orders can still be quoting in the market;however, if an order is filled, a hedge order is not submitted. Thisfunctionality may be useful when a trader wants to place an offsettingorder manually, because the trader, for example, believes that themarket is moving in the favorable direction, and the trader may make anextra profit by submitting the offsetting order manually as compared toan order that would be placed automatically by the spread trading tool.Also, it should be understood that the hedge fills functionality can becontrolled automatically based on the user-defined formula(s). Forexample, certain conditions may be used to deactivate hedging of orders.

The order ticket 900 also indicates the current state of the marketcorresponding to the spread. “Bid,” “Ask,” and “Last” fields 922, 924,and 926 indicate the calculated spread prices. It should be understoodthat different methods could be used to calculate the spread relateddata, all of which are commonly known in the art. The values in each ofthese fields could be automatically populated from an application thatcomputes spread related data based on market data corresponding to atradeable object of each leg defined for the spread.

A trader could select a “Buy” icon 928 or a “Sell” icon 930 to indicateif the spread is a buy or a sell. It should be understood that the orderticket 900 could include additional selection options and is not limitedto the illustrated parameters. The order ticket 900 also includes analert selection icon 932 that can be used by a trader to select one ormore events that could trigger an activation of an alert. The eventscould be based on the market, trader's performance, or yet some othercriteria. Also, a trader could select from a number of alert options,such as a sound alert, a visual alert, or a combination thereof

VII. Additional Trading Tools

A. Fractional Pay-Up Ticks

As described above, an automated spread trading tool may compute anorder price for one leg based on market conditions of a second leg. Whenthe order in the first leg fills, the spread trading tool automaticallysends an order to the second leg. The price of the order in the secondleg is usually set to a market price so that the order in the second legcan get filled immediately or soon after placement. Sometimes a traderwill use pay up ticks to provide further assurance that the second orderwill get filled as soon as possible, thereby completing the spread. Inother words, if the market changes in the second leg before the secondorder actually gets placed at the exchange, the trader may have missedan opportunity. By using pay up ticks, the trader is willing to “giveup” a certain number of ticks to get the second order filled.

There may be some instances when a trader wants the offsetting order toget filled, but is also willing to take some risk to get a moredesirable fill price for the offsetting order. To do so, the trader mayuse fractional pay-up ticks. Fractional pay-up ticks divides theoffsetting order quantity according to certain percentages. Then, aportion of the offsetting order quantity will be placed at one price,such as the market price (or the original price set for the offsettingorder), and the other portion(s) will be placed at other price levels(e.g., at more desirable prices or even a less desirable prices if soprogrammed and the market moves accordingly). As an example, “FractionalNegative Pay-Up Ticks” fields 910 are shown in relation to FIG. 9. Itshould be understood that the use of fractional pay-up ticks is notlimited to the use with spread orders that use the queue holderfunctionality.

A trader could use the functionality of the fractional negative/positivepay-up ticks to hedge a preset fraction of a offsetting leg order'squantity using predefined negative or positive pay-up ticks, while theremaining offsetting leg order's quantity will be submitted at aneffective spread leg order price or yet another pay up tick defined forthe leg order. It should be understood that the fractions to be used inrelation to each leg order could be dynamically set based onuser-defined formulas. The variables in the formulas could be based onmarket conditions, or user risk related data, such as a current profitlevel, a net position, or yet some other conditions. It should beunderstood that fractional pay-up ticks could be defined for each leg ofthe spread.

To illustrate one example embodiment how the fractional negative pay upticks could be used, let's assume that a trader defines a syntheticspread with an order quantity of 10, a spread ratio 1:1, a desiredspread price of 0, and both legs ticking in 1's. In relation to thepay-up tick configuration, let's assume that the pay-up tick value forthe spread is set to 1, with the fractional ratio set to 61%, and thefractional pay-up tick value set to −1. Upon entering a spread buyorder, let's assume that a spread trading tool placed a buy order havinga quantity of 10 at 100 for “leg 1” of the spread, and the buy “leg 1”order was filled. Normally, with no pay-up ticks defined, the spreadtrading tool would attempt to sell the quantity of 10 at 100 for “leg 2”to achieve the desired spread price of 0. With a pay-up tick set to 1, atrader is willing to “pay” an extra tick in order to get the spread, sothe sell order for “leg 2” having an order quantity of 10 would beplaced by the spread trading tool at the price of 99.

However, because the fractional pay-up ticks are used, only a portion ofthe quantity of 10 will be submitted at the price of 99. The spreadtrading tool may use the fractional ratio of 61% to calculate afractional pay-up tick quantity, in this example 6.1 (0.61*10) that canbe rounded down to 6 (it should be understood that the roundingmechanism could be user-configurable). Thus, using the fractional pay-upticks applied in this example, the quantity of 6 would be submitted witha first sell “leg 2” order, a fractional hedge order, at 101 (100−(−1)),and the quantity of 4 would be submitted with a second sell “leg 2”order at 99 (100−1).

To illustrate another example embodiment, let's assume that a traderdefines a synthetic spread having the same spread settings, i.e., thequantity of 10, the spread ratio of 1:1, the desired spread price of 0,and both legs ticking in 1s. In relation to the pay-up tickconfiguration, let's now assume that the pay-up tick value for thespread is set to 2, with the fractional ratio set to 39%, and thefractional pay-up tick set to 3. Let's also assume that the syntheticspread order was a sell order, and that a sell spread order for “leg 1”having an order quantity of 10 at the price level of 100 was entered andgot filled. As explained in the preceding example, if no pay-up tickswere defined, the spread trading tool would attempt to buy the quantityof 10 at the price of 100 for “leg 2” of the spread. With a pay-up tickset to 2, a trader is basically willing to pay extra 2 ticks in order toget the spread, so the spread trading tool would enter a buy orderhaving an order quantity of 10 at the price of 102 for “leg 2.” However,once again, because fractional pay-up ticks are used, the quantitycorresponding to “leg 2” will be divided based on the fractional ratio.Based on the fractional ratio, 39%, in this example, the trading toolwould submit two buy orders for “leg 2,” with the first buy order, afractional hedge order, having the quantity of 3 (0.39*10=3.9 with therounding down enabled) at the price of 103 (100+3), and the second buyorder having the quantity of 7 at the price of 102 (100+2).

It should be understood that the above examples are only illustrations,and the fractional pay-up ticks' functionality is not limited to theprovided examples. For example, fractional pay-up ticks could be used inrelation to synthetic spreads having more than two legs.

B. Scalping

The order ticket 900 also includes a “Scalping” field 912 that can beactivated by a trader for each spread leg order. When the “Scalping”field 912 is selected and one of the legs of the spread is at leastpartially filled, the auto-spreader application may generate both ascalping order and an offset order. An offset order is an order that isplaced in relation to a second leg of the spread to achieve a desiredspread price. A scalping order, as used herein, refers to an order thatis placed in relation to a tradeable object corresponding to a leg forwhich a fill was detected, and that is used to offset a position createdwith the fill. Thus, a scalping order may be used to limit the risk ofnot getting filled on the other leg of the spread.

According to one example embodiment, a scalping order and an offsetorder are submitted to each respective matching process at one or moreelectronic exchanges upon detecting a fill in one of the legs of thespread. It should be understood that a trader could pre-configure aprice level at which a scalping order is to be entered, and a pricelevel for the offset order may be dynamically determined by the spreadtrading tool based on the spread configuration parameters. The twoorders are then logically linked to manage an order quantity of eachorder upon detecting a fill in relation to the two orders. Morespecifically, the management of fills may involve monitoring fills ofeach linked order and dynamically lowering an order quantity in a firstlinked order upon detecting a fill in the second linked order. Forexample, a fill of the entire quantity in relation to an offset ordermay cause cancellation of the scalping order.

To illustrate the scalping functionality with an example, let's assumethat a trader is trading a 2:1 spread, and a quantity of 10corresponding to a buy order has been filled for the first leg of thespread at a price level of 100. To offset a position created with thefirst leg, the spread trading tool may determine a price level for ansell offset order based on a desired spread price, and send the selloffset order having a quantity of 5 (based on the 2:1 ratio) at thecalculated price. In addition to the sell offset order, a sell scalpingorder would also be sent to the market corresponding to a tradeableobject of the first leg of the spread. According to one exampleembodiment, a price level for the sell scalping order could bedetermined based on one or more user preconfigured rules. For example, atrader may wish to submit a sell in relation to the scalping order at aprice that is one or more ticks higher than the price at which the buyorder corresponding to the first leg of the spread has been filled.Also, the quantity of the scalping order is set to the quantity valuethat was filled in relation to the order corresponding to the first leg,which, according to this example, would be set to 10.

Let's assume that the sell scalping order having a quantity of 10 wassubmitted at a price of 101, while the offset order having a quantity of5 was submitted at the calculated price for the second leg of thespread. As explained above, the sell scalping order and the second legorder are linked for quantity management purposes.

Let's now assume that a quantity of 3 has been filled in relation to theorder corresponding to the second leg of the spread. Based on thepreconfigured spread ratio 2:1, the quantity corresponding to the sellscalping order would be responsively reduced by 6 by sending a changeand replace request to the matching process to replace the existing sellscalping order with a new sell scalping order having a new quantity of 4at the price of 101. Then, let's assume that the full quantity of 4 hasbeen afterwards filled with respect to the sell scalping order.Responsively to the fill, the sell order having the remaining quantityof 2 pending for the second leg of the spread would be cancelled.

While the example provided above describes an embodiment where a singlescalping order is sent, it should be understood that multiple scalpingorders having a total quantity equal to the desired quantity could alsobe sent at a plurality of price levels. For example, referring to theexample provided above, a first scalping order having a quantity of 5could be submitted at a price level of 101, and a second scalping orderhaving also a quantity of 5 could be submitted at a price level of 102.Different embodiments are possible as well.

C. Smart Hedging

As described above, an automated trading tool may send an order in oneleg of the spread and when that order gets filled (or matched), theautomated trading tool automatically sends an offsetting order to theother leg of the spread. Generally, this offsetting order is placed at amarket price so that it can fill as soon as possible. Once theoffsetting order gets filled, the spread is complete. Sometimes, pay-upticks are used (such as described above) to increase the chances of theoffsetting order getting filled.

Additionally, some auto-spreader applications are configured to activelyquote all legs of the spread at the same time to increase the chances ofachieving the spread. Using the above example, the automated tradingtool would send an order in each leg of the spread and when one of theleg orders gets filled, the automated trading tool would automaticallysend an offsetting order to the other leg of the spread (similar to theexample above), but also would cancel the remaining leg orders so as notto get double filled. However, in many instances, such as when pay-upticks are used in relation to the leg orders, the existing order in theoffsetting leg of the spread may be at a price level that achieves thedesired spread price. Thus, deleting such an order may result in theloss of the valuable queue position that a trader could have had if theorder was not deleted.

According to one example embodiment, a trader may activate smart hedgingwhen defining a spread such that an order already placed in a leg can beused as the “offsetting order.” The smart hedging functionality could beactivated with respect to each leg of the spread, as shown in FIG. 9.When the smart hedging field is activated while the two legs are beingactively quoted, and one of the leg orders gets fully or partiallyfilled, the spread trading application may determine if the orderpending in the other leg of the spread is at a price level that resultsin the desired spread price. The auto spreader application may alsocheck if a quantity corresponding to the pending order is sufficient tooffset the fill quantity.

If the pending order is at a preferred price level and the quantity isat least equal to that needed to offset the fill, the order will be leftunmodified and an offsetting order will not be sent to that leg—insteadthe already pending order in that leg will be used as the “offsettingorder.” If the quantity is less than needed, the auto spreaderapplication may submit another order at that price to achieve a desiredspread. If the pending order is not at a price level that would resultin the desired spread price, the pending order would be cancelled and anew order would be placed at the calculated order price that achievesthe desired spread price.

To illustrate how the smart hedging works, let's assume that two legorders having order quantities of 5 are being actively quoted for a 1:1spread. Also, let's assume that an order quantity of 3 gets filled inthe first leg order. Upon detecting the fill in the first leg, the autospreader application will determine if the order pending at the secondleg is at a price level that would result in the desired spread price.Assuming that it is, the order corresponding to the second leg would beleft unchanged and a new offsetting order will not be sent. Then, if theauto spreader application determines that the second leg of the spreadis to be re-quoted, the auto spreader may lower the quantity of theexisting order to 3 and send a new order having an order quantity of 2at a new price for the second leg. The auto spreader application maylower the order quantity corresponding to the second leg order bysending a change command to the matching engine.

It should be understood that when the smart hedging functionality isused when queue holder orders are submitted with respect to the secondspread leg, the order quantity of each queue holder order would bemodified upon detecting a fill with respect to the first leg order. Forexample, in relation to the example provided above, a change request tochange an order quantity from 5 to 2 would be sent to a matching processfor each queue holder order upon detecting the fill of 3 with respect tothe first leg order. It should be understood that different embodimentsare possible as well.

VIII. Market Depth Order Entry

While an order ticket is one method that can be used by a trader toenter spread orders, the trader could enter orders using differentmethods as well. One such method involves entering spread order via agraphical interface that displays market information associated with apredefined spread, such as a graphical interface 1000 illustrated inFIG. 10. However, it should be understood that different graphicalinterfaces that allow a trader to enter orders could be used as well.

The graphical interface 1000 is an example trading screen and includes avalue axis 1002 that indicates values representing prices or some otherderivative of price, such as yield, determined for the spread. Theprices or some other derivatives of price for the spread are determinedbased on market data of the underlying tradeable objects defined for thespread, the methods of which are commonly known in the art. While thevalues are displayed along a vertically oriented axis, the values may bedisplayed along a horizontally oriented axis or along an axis positionedat some other angle. Once the value axis 1002 is generated, quantity andprice information contained in the market data feeds corresponding totradeable objects of the spread is received and used to calculate spreaddata. The calculated data is then used to populate the display againstthe value axis 1002. As new quantity and price information arrives fromthe electronic exchange, the graphical interface 1000 is preferablyupdated to reflect any market changes.

The graphical interface 1000 includes a bid quantity column 1004 and anask quantity column 1006 that display bid and ask quantities,respectively. The bid and ask quantities are displayed in the locationsthat correspond to their respective value or price levels along thevalue axis 1002. By looking at the graphical interface 1000, the tradercan quickly locate the inside market, which refers to the highest bidprice and the lowest ask price, which in the example shown in FIG. 10correspond to prices 30 and 35, respectively. Further, using thegraphical interface 1000, a trader can view how much quantity isavailable at various price levels. For example, following the best bidand the best ask, there is a bid quantity of 52 at the price level of29, and an ask quantity of 29 at a price level of 36. Other levels ofmarket depth are also shown, as illustrated in FIG. 10.

The graphical interface 1000 also shows additional parameters, such as aworking quantity column 1008 that illustrates a working buy orderindicator 1010 having an order quantity of 10 at the price level of 30.The interface 1000 also includes a last traded quantity column 1012that, in this example, displays a last traded quantity indicator 1014corresponding to the quantity of 5 that was traded at a price level of35. In addition to the indicators described above, the interface 1000includes a default quantity field 1016, a number of quantity selectionicons 1018, a clear all “CLR” icon 1020, and a delete all orders (“DelAll”) icon 1022. It should be understood that additional indicatorscould be provided in relation to the interface 1000, and what isactually shown in the interface 1000 could be user configurable.

As the market conditions of the tradeable objects underlying the spreadchange, the bid and ask quantity indicators in the bid quantity column1004 and the ask quantity column 1006 move relative to the value axis1002. Thus, a trader can easily tell, among many other things, if themarket has moved up or down. A trading screen similar to that shown inFIG. 10 is commercially available as MD Trader™ in the X_TRADER® productoffered by Trading Technologies International, Inc. of Chicago, Ill.Further, various aspects of the trading screen in FIG. 10, including thedynamic movement of the bid and offer indicators against an axis, aredescribed in U.S. Pat. No. 6,772,132. Adjustable viewing of the axes,including the consolidation of price levels and quantities, is describedin U.S. patent application Ser. No. 09/971,087, filed on Oct. 5, 2001,and entitled, “Click Based Trading with Intuitive Grid Display of MarketDepth and Price Consolidation.” A variety of trading tools that can beused with the trading screen to assist in visualizing the market arefurther described in U.S. patent application Ser. No. 10/125,894, filedon Apr. 19, 2002, and entitled, “Trading Tools for Electronic Trading.”The entire content of each of the above-referenced applications isincorporated herein by reference.

The intuitiveness of the example trading screen shown in FIG. 10 resultsfrom the dynamic display of quantities shown in the bid column 1004 andask column 1006 positioned along the value axis 1002. Locations inalignment to the values along the value axis 1002 are, in essence, fixedin relation to the value or price levels. For example, a location in theask column 1012 corresponding to the price level of 35 is fixed to theprice of 35. Similar applies to the location in the bid column 1004corresponding to the price level of 35. While the locations in the bidand ask columns are shown horizontally to the location of thecorresponding price level, different embodiments are possible as well.For example, the locations corresponding to a specific price level couldbe positioned at some angle. As the market climbs up or down in value,the user can quickly view the change since the indicators in the bid andask quantity columns 1004 and 1006 will move up or down, respectively,along the value axis 1002 to reflect the market change.

If the market starts to go out of view, the market can be re-positionedalong the value axis 1002, responsive to which, the locations willbecome fixed in relation to a new set of price levels. Repositioning ofthe market information may occur automatically or manually. It shouldalso be noted that the layout of different columns in FIG. 10 is only anexample layout, and the columns could be repositioned, so that the bid,ask, and value columns could be rearranged. For example, the bid column1004 could be next to the ask column 1006.

To enter an order using the graphical interface 1000, a trader canpreset a default quantity at 1016 using quantity selection icons 1018,and then using an input device, select a cell in the bid or ask columncorresponding to a desired price of the order. For example, if the cellin the bid column 1004 associated with the price level of 30 isselected, then a buy spread order having an order quantity of 10(determined based on the default quantity at 1016) would beautomatically entered. A working order icon, such as the one at 1010,would then be displayed in the working order column 1008. A trader couldsimilarly enter a sell spread order by selecting a desired cell in theask column 1006.

According to one example embodiment, a mouse input device could be usedto position a cursor over a cell and upon selection of the mouse button(either upon the down stroke of the mouse button or upon release of thebutton, however programmed), a spread order may be submitted forprocessing by the automated spread trading application. Once the spreadtrading application processes the spread orders and determines orderparameters for each individual leg of the spread, the orders for eachtradeable object corresponding to the spread may be submitted to theirrespective electronic exchanges. In the example embodiment describedabove, a trader could distinguish a buy order from a sell order byselecting a location in either the bid column 1004 or the ask column1006, respectively. In another example embodiment, buttons on the inputdevice could be programmed so that when a particular button is pressed,it sends a buy order, and when another button is pressed, it sends anask order.

In yet another example embodiment, a keyboard may have keys that areassociated with the price levels displayed on the graphical interface,and a trader could initiate a spread order by selecting the keys.According to the example embodiment, initiating a spread order includessending leg orders to one or more host exchanges once the spread tradingapplication processes the spread order parameters to determine orderparameters for each leg order. It should be understood that before anorder is sent to an exchange, different applications, such as a riskmanagement tool, or yet some other application, could be programmed toprocess the order and prevent the order from being sent to the exchangeif certain criteria occur.

FIG. 11 is a block diagram illustrating two trading interfaces 1100 and1102 that will be used to describe a method for placing queue holderorders in relation to a tradeable object that was defined for one leg ofa spread.

The trading interfaces 1100 and 1102 are of the type illustrated in FIG.10; however, it should be understood that the example embodiments arenot limited to any order entry mechanism. In the example embodiment, itis assumed that the market data displayed in the interfaces 1100 and1102 corresponds to two tradeable objects that underlie the spreadmarket data illustrated in relation to FIG. 10.

Referring back to FIG. 10, when a trader enters a spread order having anorder quantity of 10 at a spread price level of 30, the automatic spreadtrading tool may process the spread order and use the market informationcorresponding to the second tradeable object in FIG. 11 to determine aprice level for a first spread leg order to achieve a desired spreadprice. More specifically, as shown in FIG. 11, with the best bidcorresponding to the second tradeable object at the price level of 75, abuy spread leg order for the first tradeable object is calculated to beat the price level of 105 to achieve the desired spread price of 30.Based on the example embodiments, in addition to submitting the buyspread leg order for the first tradeable object, as shown at 1104, threeadditional order queue holder orders are submitted as well. According tothe example embodiment illustrated in FIG. 11, the three additionalorders are submitted at three consecutive price levels below the pricelevel of 105. Three working queue holder orders for the spread leg ofthe first tradeable object are shown at 1106, 1108, and 1110. Asexplained earlier, the number of queue holder orders is based on userconfiguration, and fewer or more queue holder orders could be submittedto the electronic exchange as well.

FIG. 12 is a block diagram illustrating two trading interfaces 1200 and1202 that will be used to illustrate how queue holder orders aremodified upon detecting a change in market conditions. Morespecifically, as illustrated in FIG. 12, market data corresponding tothe tradeable object shown in relation to the trading interface 1202 hasmoved such that the best bid is now at the price level of 74 as comparedto the earlier price level of 1102, as shown at the interface 1102 ofFIG. 11. As the market moves, the auto-spreader application maycalculate a new spread leg order price, which, according to this exampleembodiment, falls at 104. However, rather than placing a new spread legorder at that price, there is already an existing queue holder orderpending at that price, the order 1106 shown in FIG. 11. To maintain thepreset queue holder number of 4, a new order 1210 at the price level of101 is submitted. As shown in FIG. 4, there are four currently pendingorders at the price levels of 104, 103, 102, and 101, with the orders1204, 1206, and 1208 corresponding to the earlier placed queue holderorders 1106, 1108, and 1110 that were shown in relation to FIG. 11.

While the spread orders are being executed, a trader could also view anexecution status of a spread via a status interface. FIG. 13 is a blockdiagram illustrating an example graphical interface 1300 that shows anexecution status corresponding to a spread order and that allows atrader to perform additional operations related to the spread order.

The graphical interface 1300 includes a price field 1302 that shows aspread price level. The background of the price field 1302 could becolor-coded to indicate if the spread is being bought or sold. Accordingto one example embodiment, “Quantity” field 1306, “Queue Holder” field1308, and “Spread Calculation” field 1322 are fixed and cannot bechanged during the execution of the spread. A trader can view thequantity covered for each of the legs via quantity field 1304. Thecovered quantity field could also be linked to another computingapplication that can use the filled quantities in some othercalculations.

The interface 1300 also displays “Pay-Up” tick values and “Base Volume”that are used in relation to each leg of the spread, as shown at 1312and 1314. A trader could also delete all spread leg orders pending atthe exchange(s) by selecting “Delete All” field 1316. “Hedge fills”field 1320 can be activated to automatically send a hedge order in thespread leg for which the field 1320 is activated upon a fill of thespread order in the other leg. A trader could deactivate the “Hedgefills” functionality if the trader, for example, does not want to submitan offsetting order in the other leg of the spread, but rather wants tomanually submit an offsetting order in the leg for which a fill wasdetected to potentially make profit on changing market conditions inthat leg. The interface 1300 also provides “Sounds” field 1324 toactivate different sounds that can be played to alert a user whendifferent user-configured events are detected.

Using a typical automated spread trading application, and depending onthe market conditions of each tradeable object underlying the spread,the spread leg orders may be often re-quoted to achieve a desired spreadprice. However, in some instances, a trader may wish to complete aspread trade even if the currently pending orders will not result in thedesired spread price. A trader could manually stop quoting each leg ofthe spread by selecting “Stop Requoting” field 1318. According to oneexample embodiment, selection of the “Stop Requoting” field 1318 mayresult in freezing of all queue holder orders at their current pricelevels. When quoting is disabled, a trader could once again restartquoting by selecting the “Stop Requoting” field 1318.

According to another example embodiment, the stop quoting functionalitycould be activated automatically upon detecting one or more user-definedstop quoting conditions. For example, the stop quoting conditions couldbe based on order related status, such as when one of the orders crossesthe inside market, or when a trader selects “Delete All” field 1316.Also, requoting may be stopped when all legs have been filled, or upondetecting an error from another application, such as Excel. Therequoting could also be stopped based on exchange related conditions,such as, when submission of an order failed. The stop requotingconditions could also be based on market depth corresponding to one ormore tradeable objects underlying a spread. One such criterion could bebased on thin depth, which may be detected when a total quantityavailable at the first price level of the queue holder order is notsufficient to support the spread. The thin depth may be calculated basedon a user-defined equation, such as the one described earlier. Also,another stop requoting condition could be based on market volatility,such as when the price movement of one or more tradeable objectsunderlying a leg is higher than a user defined value. According toanother embodiment, the stop requoting functionality could be activatedbased on the movement of queue holder orders. For example, the stoprequoting could be automatically activated if one of a queue holderorders has to be moved more than twice the number of queue holders, oryet some other user-defined number, in a single move. It should beunderstood that different conditions could be programmed as well toautomatically trigger the stop requoting functionality.

It will be apparent to those of ordinary skill in the art that methodsinvolved in the system and methods described above for spread orders oryet some other orders generated by the automatic or semi-automaticapplications may be embodied in a computer program product that includesone or more computer readable media. For example, a computer readablemedium can include a readable memory device, such as a hard drivedevice, a CD-ROM, a DVD-ROM, or a computer diskette, having computerreadable program code segments stored thereon. The computer readablemedium can also include a communications or transmission medium, suchas, a bus or a communication link, either optical, wired or wirelesshaving program code segments carried thereon as digital or analog datasignals.

The claims should not be read as limited to the described order orelements unless stated to that effect. Therefore, all embodiments thatcome within the scope and spirit of the following claims and equivalentsthereto are claimed as the invention.

1. (canceled)
 2. A method including: receiving by a computing device anindication that at least a portion of a first leg order of a tradingstrategy has been filled, wherein the indication is received after thefirst leg order and a second leg order of the trading strategy have beensent; determining by the computing device whether a desired strategyprice for the trading strategy would be achieved based on the price forthe second leg order of the trading strategy; and using by the computingdevice the second leg order as an offset order for the first leg orderwhen the desired strategy price for the trading strategy would beachieved.
 3. The method of claim 2, wherein the computing device is atrading station.
 4. The method of claim 2, wherein the trading strategyis a spread.
 5. The method of claim 2, wherein the first leg order is inan order book of a first electronic exchange and the second leg order isin an order book of a second electronic exchange.
 6. The method of claim5, wherein the first electronic exchange is the same as the secondelectronic exchange.
 7. The method of claim 2, wherein the desiredstrategy price for the trading strategy is achieved at the price for thesecond leg order.
 8. The method of claim 2, wherein determining whethera desired strategy price for the trading strategy would be achieved isfurther based on a pay-up tick value.
 9. The method of claim 2, whereindetermining whether a desired strategy price for the trading strategywould be achieved is further based on a fractional pay-up tick value.10. The method of claim 2, wherein determining whether a desiredstrategy price for the trading strategy would be achieved is furtherbased on a quantity for the second leg order.
 11. The method of claim 2,wherein determining whether a desired strategy price for the tradingstrategy would be achieved is further based on a filled price for the atleast a portion of the first leg order.
 12. The method of claim 2,wherein determining whether a desired strategy price for the tradingstrategy would be achieved is further based on a filled quantity for theat least a portion of the first leg order.
 13. The method of claim 2,further including: sending by the computing device a message to cancelthe second leg order when the desired strategy price for the tradingstrategy would not be achieved; and sending by the computing device amessage to place an offsetting order that achieves the desired strategyprice.
 14. The method of claim 2, further including: sending by thecomputing device a message to change the second leg order to a new pricewhen the desired strategy price for the trading strategy would not beachieved, wherein the new price achieves the desired strategy price. 15.The method of claim 2, further including: sending by the computingdevice a message to place a second offset order when a quantity neededto offset a filled quantity for the at least a portion of the first legorder is greater than a quantity for the second leg order.
 16. Themethod of claim 2, wherein the second leg order is one of a plurality ofqueue holder orders.